Pension companies charging “rip-off” management fees that eat into the retirement pots of workers are to face new legal curbs, under plans being drawn up by ministers.
The Office of Fair Trading (OFT) is expected to conclude this week that millions of savers are being exploited by complex pension charges which can wipe out up to a third of pension pots in fees and commission.
In response, the Government proposes to implement a cap on charges for millions who are being “auto-enrolled” in pension schemes by their employers. Companies will also be banned from ramping up the charges for workers who move jobs but leave money in pension schemes. The OFT found evidence that some pension companies doubled their management fees when members stopped paying.
The move comes in advance of the expansion of auto-enrolment, under which all firms will eventually have to offer pension schemes to employees. Under the scheme, workers not wanting to take part must opt out. It is designed to improve pension take-up and is expected to cover up to nine million workers by 2018.
Ministers are concerned that because pension schemes are chosen by employers for their workers there is not necessarily the incentive to find the best deal. They are also worried that the workers are vulnerable to pension providers “racking up” their charges once they have signed up a firm as a client. “The problem is that employers are choosing these pension providers – and they don’t necessarily have a stake in ensuring they are providing good value for money,” said a government source. “So far, auto-enrolment has just affected large firms, but as it is rolled out to smaller firms the risk of rogue sellers is greater – and that is what we are trying to address. Some smaller businesses will not have the experience to determine whether a pension fund is good value.”
The source said the cap would also prevent pension firms from surreptitiously increasing their charges. “Without action there is clearly a risk that, as time goes on, charges will increase, but employers have no direct incentive to change providers.”
The change is being promoted by Steve Webb, the Liberal Democrat minister responsible for pensions, but is also believed to have the backing of the Work and Pensions Secretary Iain Duncan Smith. It is expected the cap will be around 1 per cent. Some experts believe it should be lower.